DENMARK - The Danish financial regulator (Finanstilsynet) has acted to save pension funds from a market "anomaly" eating away at their solvency levels.

The watchdog introduced a new alternative discount yield curve for lateral pension funds and insurance companies to use to calculate how much they should set aside to cover pension guarantees.

The new discount yield curve is based on a 12-month moving average of the yield differential between Danish and German government bonds.

Deputy director general Jan Parner said: "With this technical change to the discount yield curve, we are supporting companies in being able to manage their yield-differential risks better.

"To that end, the new discount yield curve and individual solvency needs will combine to break the self-reinforcing negative spiral - which could otherwise arise if companies try to cover the yield differential (between Denmark and Germany) by buying Danish bonds."

Without this new alternative, it is estimated that Danish pension funds would have seen their buffers depleted by around DKK50bn (€6.7bn), a spokesman for the regulator said.

A few pension funds had slipped into the red zone of the regulator's traffic-light solvency scenario before Monday's measure, he said.

Under current rules, which have been in place since 2004, the companies have used the euro swap curve and the spread between Danish and German government bonds.

In 2008, an add-on composed of the difference between the original curve and the yield on a Danish mortgage bond was introduced as part of the pensions rescue package.

The regulator said the latest technical change was necessary because, under the recent "abnormal financial market conditions", the companies' behaviour was not "desirable", and there was a need for a circuit breaker.

These abnormal conditions comprised low interest rates in general, falling Danish yields relative to their German counterparts, poor market liquidity and greater volatility.

The regulator said: "The advantage of a country spread based on a moving average of historical data is that it takes account of daily market changes, as well as dampening the effect of day-to-day swings."

Those companies using the new discount yield curve would see a correction in their economic buffers, and a proportion of these extra reserves would then be included in the individual solvency requirement, the regulator said.

This would then leave firms better equipped to withstand any future negative development in the yield differential between the two countries, it said.

The new discount yield curve is seen as permanent until the implementation of Solvency II.

"But," the regulator's spokesman added, "if this negative spread proves to be permanent, we will re-evaluate."

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